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Consider two polluting firms. The marginal cost of abatement for firm 1 is MC1 = e1...

  1. Consider two polluting firms. The marginal cost of abatement for firm 1 is MC1 = e1 + 300, and the marginal cost of abatement for firm 2 is MC2 = 3e2, where e1 and e2 are the tons of pollution abatement by firms 1 and 2, respectively. Baseline pollution levels are bl1 = 2000 and bl2 = 2000.

Suppose the government sets a pollution reduction goal of 1600 total units of abatement.

  1. Write down two equations that ensure that the goal will be met cost-effectively. Explain in words what each equation ensures.

  1. Solve the equations for the cost-effective abatement allocation e1 and e2.

  1. Suppose that the government wants to achieve this abatement level with a pollution tax. What tax rate (in dollars per ton) should be levied? How much tax revenue will be raised from each firm?

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